Monthly Archives: June 2015

Post navigation

The AIA A401 Subcontract allows an unpaid subcontractor to stop work until payment is received, “upon seven additional days’ written notice to the Contractor.” (§4.7.1).

In a New York school construction dispute, the subcontractor was unpaid for three months and stopped work, but did so without providing the contractual 7-day notice prior to suspending work. The Court excused the subcontractor’s untimely notice by finding that the general contractor materially breached the subcontract by failing to pay the subcontractor. U.W. Marx, Inc. v. Koko Contracting, Inc., 2015 WL 263904 (3d Dep’t. 2015).

Obviously, the best course of action is to provide the proper notice prior to stopping work, but this case may provide some relief to unpaid contractors and subcontractors who neglect to provide proper notice prior to stopping work.

Public-private partnerships (P3s) are hot in an era of budget cutbacks and the need for alternative, innovative ways to repair and replace our aging public infrastructure. P3s can help bridge the infrastructure gap by using private capital to finance large infrastructure projects and leveraging funding payments over the useful life of the new facilities. P3 isn’t the solution for all public infrastructure needs, but it’s a growing and important tool for public agencies to utilize for appropriate projects.

P3 typically involves a long-term partnership between the public entity owner and a private developer (known as a concessionaire) for the concessionaire’s design, build, financing, operation, and maintenance of a substantial public improvement work. Usually a P3 project is built on public land and involves the construction and operation of public infrastructure by the concessionaire with a projected revenue stream that’s used to help secure and repay the project costs over time.

There are some significant differences between traditional public works projects and P3 projects:

Project financing. A traditional, large public works project usually involves some form of public bond financing, often supplemented by federal grant money, to raise the funds necessary to pay the design and construction costs. In a P3 project, the concessionaire typically obtains all or most of the financing and is paid either directly from the project’s revenue stream once construction is completed and operating, or by the public owner via milestone and other “availability” payments spread over time.

Management of the project’s responsibilities and risks. By forcing the coordination of the new facility’s design and construction with the consideration (and risks) of its long-term performance (via operations and maintenance), the P3 project allows the public owner to ensure that both the construction period risks and long-term operations and maintenance risks for the facility are optimized, and transfers most of these risks to the concessionaire, who’s in the best position to control them.

By bundling the asset’s design and construction with its long-term operation and maintenance from the outset of development, P3 represents an important evolution of the efficiencies realized in the design-build project delivery method. This, combined with P3’s element of increasing budget leverage for public entities in the short term, has greatly increased public agencies’ interest in P3 and promises to spark its use and growth in California and throughout the U.S.

Learn more about P3s in Public-Private Partnerships: Bridging California’s Infrastructure Gap in the March 2015 issue of CEB’s Real Property Law Reporter. On public works financing generally, check out CEB’s The California Municipal Law Handbook, chap 5.

In Atain Speciality, the Northern District of California entered a default judgment in favor of the insurer because the damages alleged in an underlying construction defect action were not discovered until after the policy period and because the “Total Residential Construction” exclusion applied.

The underlying construction defect action alleged property damage in connection with the construction of a 429-unit apartment complex. The insured general contractor and subcontractor tendered their defense to their CGL carrier, which had issued a policy that provided coverage only for property damage that is discovered within its policy period. The policy also contained a “Total Residential Construction” exclusion, which eliminated coverage for property damage to “any condominium, townhome, single family dwelling and other residential or track housing project.” The carrier denied coverage because the property damage at issue was discovered almost two years after the expiration of the policy period, and because the units at issue were residential properties. The carrier filed a declaratory relief action against the insureds, and the Northern District of California granted a default judgment for the carrier on both grounds.

Your insurance policy may not cover the costs of an expensive Chapter 558 construction defect process. Florida’s construction defect statute, Chapter 558, requires an owner to notify contractors of all alleged construction defects. After the notice is sent, the contractor notifies all of the trade contractors and a potentially expensive and time-consuming process of hiring experts, property inspections and letter writing ensues. Contractors will look to their insurance companies to cover the costs of hiring attorneys and experts to protect their interests during the process. Depending on the size and complexity of the project and the length of the owner’s list of alleged defects the 558 process can be expensive.

In Altman Contractors, Inc. v. Crum & Forster Specialty Insurance Company, Case No. 9:13-cv-80831-KAM (S.D. Fla. June 4, 2015), Altman’s insurer refused to cover Altman’s legal and expert costs incurred in the 558 process. The insurance company successfully argued that the 558 process is not a lawsuit and it is not a formal dispute resolution proceeding; thus, the insurance company is not required under the policy language or Florida law to pay for the expenses of the 558 process.

The Federal Court noted that whether an insurer is required to defend a Chapter 558 proceeding is a case of first impression in Florida. The Court had to decide whether the 558 process triggered the insurance companies duties under the insurance contract even though the owner’s allegations of construction defects were being asserted in a mandatory pre-suit notice and not in a formal dispute resolution process such as a lawsuit.

The Court reviewed the insurance policy and determined that the insurance policy specified that the insurer’s duty to provide a defense was triggered by a formal “Suit” defined as litigation, arbitration or another formal dispute resolution proceeding. Next the Court evaluated whether the Section 558 process was a formal dispute resolution proceeding. The Court did not find any Florida cases on point so it reviewed cases outside of Florida that defined dispute resolution proceedings. Although the Court acknowledged some cases that broadly defined formal dispute resolution proceedings, the Court determined that the Section 558 notice and right to cure statute provides owners and contractors with a “mechanism” to resolve a dispute and not a formal “proceeding.” Thus, the Court held that the insurance company properly denied the contractor with a defense.

The Court’s decision has significant consequences for contractors. Contractors rely on their insurance and the insurance of their subcontractors to cover legal and other costs that are inherent in participating in a 558 process. There are three things that contractors and subcontractors can do to avoid going out of pocket for legal fees in a 558 process. The first option is to seek a modification of their insurance policy that would specifically require their insurer to pay for a legal defense during the 558 process. The second option is state in their contract with the owner that 558 will not apply to the contract and thereby avoid the process altogether. Section 558 specifically allows contracting parties to opt out of 558. The last option is to send an immediate formal denial of the allegations of any 558 notice rather than engaging in the process.

Remember, 558 is supposed to protect contractors by forcing owners to give notice of defects and provide a contractor with a reasonable opportunity to cure the defects and avoid litigation. However, if the 558 process itself presents a financial burden that your insurer will not cover, then you have options. Insurers should understand that the 558 process can lead to an early resolution of owner claims and a savings to the insurance company of defense and claims costs; thus, insurers should weigh the benefits of covering defense costs of a 558 process against the costs of a formal dispute resolution proceeding.

Last week in Performance Arts Cmty. Improvement Dist. v. ACE Amer. Ins. Co., 2015 WL 3491292, 2015 U.S. Dist. LEXIS 71592 (W.D. Mo., June 3, 2015), a federal court in Missouri shot down an insured’s arguments that a wall collapse caused by the excluded peril of defective design was a covered ensuing loss under a builder’s risk policy. The developer admittedly erred in calling an for excess amount of concrete slurry to be pumped behind the structure, but the policyholder contended that the collapse that the mistake caused was a separate loss by “excessive lateral pressure.” The court analogized to that to arguing that the collapse of a defectively-designed building was a separate loss caused by the covered peril of gravity.

The policyholder had contracted for the construction for a parking garage adjacent to a performing arts center in Kansas City, and the project included the installation of a 50’ high concrete retaining wall between the structure and an adjacent limestone rock face. The original design called for up to 18” of concrete slurry to be poured between the wall and the limestone embankment, but, at the general contractor’s insistence, it was modified to permit up to 36” of the fill material to be installed. While the slurry was being pumped in place, the wall cracked and failed, and it was uncontested that the change to 36” of fill was a design defect.

The insured made claim under its builder’s risk policy, but the carrier denied because the contract of insurance barred coverage for a loss caused by “[e]rror, omission or deficiency in design, plans, specifications, engineering or surveying.” That exclusion was prefaced by an ensuing loss exception that restored coverage when “direct physical loss or damage by an insured cause of loss ensues,” however. The policyholder brought suit, contending that excessive pressure caused by the additional fill constituted a covered ensuing loss.

Last Wednesday, the Western District of Missouri granted the carrier’s motion for summary judgment, holding that the insured’s arguments were “not legally viable.” As Senior District Judge Ortrie Smith explained, the policyholder’s contention sought “to separate the defective design from the losses incurred because the defective design was actually utilized” which was tantamount to saying that the only loss that was but wasn’t excluded was the cost of obtaining non-defective plans. That effectively meant that “the ensuing loss exception … swallow[ed] the exclusion to which it [was] appended.”

The court held that an ensuing loss must be a distinct loss that comes after the excluded loss. In words of the opinion:

an ensuing loss is one that occurs subsequent to the excluded loss. Plaintiff characterizes the wall’s physical failure as an “ensuing loss” by characterizing the provision of defective plans as an event distinct from the use of those plans to create a wall that was defective. The problem is that there was only one event and only one loss so there is nothing “ensuing[.]”

* * *

If a defective-designed building collapses, one does not characterize the effect of gravitational forces as a distinct and separate event, and the cost of replacing the collapsed building is not an ensuing loss. Similarly – as here – if a defectively designed retaining wall fails to retain the pressure it was intended to retain, one does not characterize the pressure as a distinct and separate event, and the resulting need to replace the defectively designed wall is not an ensuing loss.

Disclaimer

This Blog/Website is made available by the expert or expert witness firm publisher for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand that there is no attorney client relationship between you and the Blog/Webwite publisher. The Blog/Webwite should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.